Hungary's budget deficit soars amid strained finances and EU funding suspensions

After experiencing a surplus in the previous month, Hungary faced a significant monthly budget deficit in October, surpassing the government's initial target and intensifying concerns about the nation's financial stability. The shortfall signals challenges for the cash-strapped Cabinet that is desperately seeking EU funds, that remain suspended by Brussels due to ongoing concerns related to Hungary's adherence to the rule of law.

In October, Hungary's budget deficit expanded by HUF 222 billion forints ($626.65 million), contributing to a total deficit of HUF 3.487 trillion forints ($9.84 billion) for the January-October period, as reported by the Finance Ministry. Despite a government modification of the 2023 deficit target from 3.9% to 5.2% of the GDP in September, analysts express skepticism, suggesting a potential for further budget slippage unless additional measures are implemented to curtail spending.

Costly subsidies
A significant portion of the monthly deficit is attributed to the fiscal burden associated with the Overhead Protection Scheme, particularly the substantial loss compensation provided to utility providers, amounting to HUF 196 billion in October alone. The Ministry's press release also shed light on challenges related to EU funds, citing a year-to-date gap of HUF 959.7 billion between project pre-financing and revenue. This gap is higher than in September, indicating increased burdens in October, though these expenditures might be linked to ongoing projects, while others have been postponed, revealing a concerted effort to control budgetary expenses.
Hungary's budget has historically encountered year-end deficits, often driven by unforeseen economic challenges. However, this year stands out as a departure from the norm, lacking the impact of such unforeseen crises. Notably, the government has already addressed recapitalizations and loss compensations during the year, mitigating their potential impact on the year-end budget. Analysts at ING Bank in Budapest suggest that while the deficit target appears unrealistic based on technical projections, the heavily backloaded pattern is not anticipated to repeat in 2023, minimizing financing concerns even if the Maastricht deficit target of 5.2% is not met.

Much needed cash
In the backdrop of these financial challenges, Hungary urgently requires the release of EU development funds, currently withheld by the European Union. Tensions between Hungary and Brussels over rule of law compliance remain in place and recent statements from EU officials provide little encouragement. European Commissioner Johannes Hahn clarified that negotiations for EU funds would not occur until rule of law compliance is thoroughly assessed. The ongoing assessment, initiated following the EU's decision to freeze €22 billion in funds due to rule of law concerns in December, remains a contentious issue. Despite concerns, Hungary's funds are unlikely to be released under pressure, emphasizing the EU's commitment to compliance with the rule of law and a positive assessment by the Commission on remedial measures.
As the Commission awaits the results of the Hungarian judiciary council elections in the coming weeks, EU lawmaker Petri Sarvamaa emphasized the importance of ensuring that the necessary conditions for fund release are met. The unfolding events add complexity to Hungary's financial landscape, demanding a delicate balance between financial stability, EU compliance, and the pursuit of essential funds to address the budget shortfall and finance critical investments.